The duo who dethroned Pimco as kings of the bond market

Reuters

One half of the duo: Tad Rivelle

Now their firm, Los Angeles-based TCW Group, has dethroned Pimco as the manager of the largest actively managed bond fund in the world.

The two men have been driven by a shared desire to emulate Pimco while rejecting the star fund manager culture that Gross personified, current and former colleagues say.

“There was always an ambition to beat Pimco, bordering on obsession,” for Landmann and Rivelle, says Chris Scibelli, the former head of US marketing at TCW who was their partner for over a decade.

But they now contend with a far different market than the one Gross reigned over for almost 20 years. Rising interest rates are damping returns of even the best bond pickers, and investors increasingly prefer passive funds like those offered by Vanguard Group.

TCW’s largest fund, called Metropolitan West Total Bond Return Fund, manages about $ 79 billion and has received $ 46 billion of new investments since September 2014 when Gross quit Pimco, sparking an investor exodus. That is about $ 20 billion more than any other actively managed bond fund received in the same period, according to data from Morningstar. Gross is pursuing a breach-of-contract suit against Pimco.

Still, the fund falls far short of the $ 171 billion Vanguard’s largest bond fund manages and the $ 293 billion Pimco Total Return managed at its peak in 2013.

And in their push to the top, Landmann and Rivelle have built a business with striking similarities to Pimco, competitors and former colleagues say.

MetWest Total Return is less manoeuvrable at its current size, something Pimco has long been criticised for, and its performance declined as it grew.

The MetWest fund averaged 5.72% annual returns over the past 10 years, third highest among 293 comparable funds tracked by Morningstar. Its managers excelled at finding undervalued corporate and mortgage-backed bonds that larger funds passed over, but it has become harder to find enough such investments at the fund’s new size, competitors and former colleagues say. The fund lagged behind its benchmark index for the past three years and is ranked 76th in its class by Morningstar in 2016.

TCW executives blamed the drop-off in performance on a premature decision to cut back investments in corporate bonds, which they believe are overvalued and ripe for a selloff. The firm has hired 10 credit managers and traders in the past two years, to find cheap bonds when the downturn they expect arrives.

“As we learn time and time again, there are cycles,” Rivelle said. Companies are “darned overleveraged, and higher rates may cause a reckoning.”

Rivelle has also gained a reputation as a caustic manager, alienating some colleagues much as Gross did, according to six executives and portfolio managers who worked for him and quit. He proved ruthlessly effective in the boardroom as well, ousting the CEO with whom he founded his former firm, Metropolitan West Asset Management, to consolidate control of the company, former colleagues say.

When asked about his management style, Rivelle said that his primary focus is running a successful and meritocratic business, not being friendly with colleagues.

Rivelle, a bookish mathematician, and Landmann, a more gregarious former Dartmouth College football player, have a strong motivation to show they can keep TCW growing despite their recent returns and the shift in bond markets.

They and other partners in the company own close to 40%, while private equity firm Carlyle Group owns 60%, and have been exploring a sale for more than a year, people familiar with the matter say.

Messrs. Landmann and Rivelle quit Pimco more than two decades ago to join a much smaller competitor, Hotchkis & Wiley, before founding their own firm, MetWest in 1996.

They established a strong record – averaging 6.5% annual returns in the first 10 years – and wooed brokers to position MetWest Total Return as the go-to bond fund offered to investors seeking an alternative to investment giants Pimco and BlackRock, people involved in the process said. The strategy put MetWest in pole position when Gross’s exit sent investors looking for a new bond fund.

“We spent decades laying the groundwork for this,” Landmann says.

Providence also played a part.

Growth at MetWest tapered after the credit crisis but in 2009 Messrs. Landmann and Rivelle received an inquiry from Marc Stern, TCW’s CEO. Stern was planning to fire star fund manager Jeffrey Gundlach and wanted to bring in the MetWest team to replace him.

MetWest’s partners agreed to a $ 300 million deal of cash and stock.

The sale of MetWest made the firm’s partners shareholders in TCW and they gradually took over, culminating in a management buyout with Carlyle in 2012 that replaced Stern as CEO with a MetWest transplant, David Lippman.

Despite their growing stature in the investment world, the pair keep a low profile – they both drive nondescript Lexus sedans – and, unlike Gross, restrict their public commentary to financial markets. They also tout the collaborative approach in the office.

But like Gross, Rivelle is prone to flashes of temper and is known for publicly upbraiding subordinates on the trading floor, former MetWest employees say.

Former TCW commodities portfolio manager Charles Erb recalls a meeting he had with Rivelle early in 2010, to present new business ideas. He had barely begun when Rivelle “lit into me, and questioned my understanding of the subject area,” Erb said.

Now that MetWest Total Return has surpassed Pimco, Rivelle and Landmann are grappling with their next step. Investors withdrew about $ 400 million from the fund last month, the first outflow since November 2013.

Carlyle aims to ratchet up its efforts to exit its TCW investment in 2017 and any deal would likely value the firm at more than $ 1 billion, people familiar with the matter said.

The bond manager’s executives have made it clear they would reject any proposed deal that would encroach on their autonomy, likely ruling out bidders intending to fold TCW into other asset management firms and narrowing the field of potential buyers, people familiar with the matter said.

Write to Matt Wirz at matthieu.wirz@wsj.com and Justin Baer at justin.baer@wsj.com

This article was published by The Wall Street Journal

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